27 April 2011

Sri Lanka initial public offerings may more than triple to a record this year after the nation’s stock index posted the biggest gain in Asia, according to managers of three of the five share sales since Jan. 1.

The number of IPOs may jump to as many as 25 from seven in 2010, according to investment firms Acuity Partners (Pvt) Ltd and John Keells Capital, which led three sales that accounted for 69 percent of the $28.9 million total raised in 2011.

Companies are lining up to sell stock after the Colombo All-Share Index soared more than threefold since the end of a 26-year civil war in May 2009 and climbed 11 percent so far this year. With the Securities and Exchange Commission predicting market capitalization could climb by 27 percent to about 3 trillion rupees ($27 billion) this year, the IPOs may weigh on share prices, according to John Keells Capital, the investment arm of Sri Lanka’s largest listed company.

“There might be a little bit of a reallocation of funds and resources from existing stocks to IPOs,” Chinthaka Ranasinghe, assistant vice president at John Keells Capital, said in a phone interview from Colombo. “You might see a little bit of a correction.”

John Keells Capital and brokerage Taprobane Securities (Pvt) Ltd. managed the $13.6 million offering for tea and rubber producer Free Lanka Capital Holding Ltd., the country’s biggest IPO this year. The 180 initial share sales in Asia Pacific emerging markets have raised $20.1 billion so far in 2011, while the 519 deals worldwide have raised $68.9 billion, according to data compiled by Bloomberg.

‘Strong Bite’

Stocks in the Sri Lankan index were valued at an average of 26.6 times reported earnings as of the week ended April 21, according data on the Colombo Stock Exchange website. That’s the highest valuation in the Asia Pacific region apart from the 27.4 price-earnings ratio for New Zealand’s NZX 50 Index. Equities in the MSCI Emerging Markets Index are valued at 13.4 times earnings, while the MSCI World Index is at 14.8 times.

“It’s very expensive,” said Acuity Partners’ Group Chief Executive Officer Ray Abeywardena. “A global investor has a wide market to select from, so a new stock coming out at 12 to 13 times multiples will be a strong bite.”

The eight IPOs priced in Sri Lanka last year raised a total of $36.5 million, according to Bloomberg data. Laugfs Gas Ltd. was the largest, raising $22.6 million for the sale of voting and non-voting shares. The voting stock has climbed 52 percent since the company started trading on Dec. 8.

‘Huge Appetite’

“There’s a huge appetite,” Abeywardena said. “People are very hungry for the right one. But it will be determined by valuations.”

New listings with higher valuations may still attract investors, according to Vajira Kulatilaka, chief executive of National Development Bank Plc’s investment banking division.

Dialog was valued at 21 times earnings when it first started trading in 2005, Kulatilaka said. The company’s share sale raised $85.4 million, the most among all of the country’s new listings since 2003.

Investment Plans

Sri Lanka’s economy expanded 8 percent in 2010, the most since 1978, the statistics department said on March 29. It grew 3.5 percent in 2009 after President Mahinda Rajapaksa’s government ended the Liberation Tigers of Tamil Eelam’s quest for a separate homeland, prompting companies including Shangri- La Asia Ltd. and Nestle Lanka Plc to announce investment plans in the country.

The All-Share Index surged 96 percent in 2010, the world’s best performance apart from Mongolia, and extended the rally this year in Asia’s best performance.

External factors including higher oil prices increased the risk of “corrections” and “some kind of tapering off,” said Dinal Wijemanne, managing director of Taprobane Securities. The brokerage is aiming to manage as many as six more share sales this year, in addition to the Free Lanka Capital Holding deal.

“The last two years’ performance is not sustainable, with the number of IPOs coming in this year,” Wijemanne said. “Maybe local investors got a bit spoiled by the kind of returns we experienced, but it’s just not possible to maintain that.”

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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